House approves FAA bill; Goldman upgrades Southwest Airlines

LauraMandaro

The U.S. House of Representatives approved a bill that would authorize $68 billion in funding for the Federal Aviation Administration, the U.S. agency that oversees the air-traffic control system at the nation's airports.

But political action on FAA funding, which now moves to the Senate, faces a bumpy road. The White House has said it opposes the way the House bill would tax airlines to fund the FAA, a view in line with most commercial airlines.

Giving up gains

The Amex Airlines Index
closed down 2.4%, as 11 of 13 stocks in the index ended lower.

The benchmark gauge had tacked on 4.5% in the prior two days, helped by enthusiasm over the Federal Reserve's half-point cut to interest rates on Tuesday. On Thursday, however, the major indexes fell, dampened by a gloomy outlook from FedEx Corp.
FDXSee Market Snapshot.

Alaska Air Group
FDX, -0.24%
shares led decliners with a more than 5% drop after Goldman Sachs cut its rating on the carrier, while Continental Airlines Inc.
ALK, +1.38%
closed down more than 4%.

Oil prices continued to climb, spelling future woes to the fuel-dependent airline sector.

Crude oil for October delivery briefly climbed as high as $84.10 a barrel in electronic trading, a level never before seen by a front-month contract. It closed up $1.39, or 1.7%, at $83.32 after reaching $83.90 during the regular trading session on the New York Mercantile Exchange. See Futures Movers.

Pressure on the bottom line from rising fuel costs prompted Credit Suisse analyst Daniel McKenzie to cut his fourth-quarter profit estimate for United Airlines' parent UAL Corp.
LUV, +0.38%
and lower his target price on UAL's shares to $55 from $58.

McKenzie said UAL's recent forecast for third-quarter unit revenue growth topped his expectations, more than offsetting higher costs. But the recent spike in fuel prices prompted McKenzie to cut his forecast for fourth-quarter profits to a loss of 90 cents compared to a profit of 15 cents.

On Wednesday, UAL said it anticipated fuel costs averaging $2.22 a gallon in the third quarter, less than expected, but rising to $2.49 a gallon in the fourth quarter.

Shares closed down more than 2%.

Goldman Sachs analyst Robert Barry, meanwhile, upgraded low-cost Southwest Airlines Co. to neutral from sell, citing the defensive nature of the stock at a time as the U.S. economy comes under pressure and oil prices rise.

Barry also cut his rating on American Airlines' parent AMR Corp.
UAL, +3.34%
to sell from neutral and his price target to $22 from $25, saying the airline's transatlantic traffic is weighted to the U.K., where competitive pressure is growing and the economic outlook is deteriorating.

AMR shares fell a little more than 3%.

In other actions, Barry cut his rating on Alaska Air to sell from neutral, citing the Seattle carrier's exposure to the U.S. economy, and the West coast in particular, where it said low-cost carrier pressures have been mounting.

"Our enthusiasm for airline equities remains tempered despite recent weakness in the shares, owing largely to expected slowing in the US economy, risks to certain global economies, and growing oil-related risk," he wrote in a note to investors.

Barry lifted his price target on UAL to $47 from $39 while keeping his neutral rating.

Air-traffic control, Virgin America chief

In Washington, D.C., the House voted 267-151 in favor of H.R. 2881, legislation that would underwrite a major upgrade to the nation's air traffic control system, paid for partly by higher jet fuel taxes. It also gave airports the ability to raise passenger facility charges to $7 from $4.50 a ticket and requires airlines to have plans to remove passengers from planes after long ground delays.

The vote falls short of the two-thirds majority necessary to override a veto, which was threatened by the White House Wednesday.

In other airline news, the Department of Transportation earlier in the week gave Virgin America CEO Fred Reid 90 more days to stay in his job but said he must quit the air carrier altogether when the period ends on Feb. 18.

In May, Virgin America won a drawn-out fight with U.S. aviation authorities, labor unions and domestic carriers over its application for U.S. flight certification, a prerequisite to offering domestic flights, by distancing itself from British entrepreneur and Virgin founder Richard Branson.

Among the stipulations, Reid has to terminate his position as Virgin America CEO within 180 days of the airline getting certification, or in November, and his employment as a consultant 90 days later. The extension gives Reid more time as CEO but keeps his departure date from Burlingame, Calif.-based Virgin America the same.

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